Oligopoly is a common market form.

As a quantitative
description of oligopoly, the four-firm concentration ratio is
often utilized. This measure expresses the market share of
the four largest firms in an industry as a percentage. For
example, as of fourth quarter 2008, Verizon, AT&T, Sprint
Nextel, and T-Mobile together control 89% of the US
cellular phone market.
Oligopolistic competition can give rise to a wide range of
different outcomes. In some situations, the firms may
employ restrictive trade practices (collusion, market
sharing etc.) to raise prices and restrict production in much
the same way as a monopoly. Where there is a formal
agreement for such collusion, this is known as a cartel. A
primary example of such a cartel is OPEC which has a
profound influence on the international price of oil.
Firms often collude in an attempt to stabilize unstable
markets, so as to reduce the risks inherent in these markets
for investment and product development.[citation needed] There
are legal restrictions on such collusion in most countries.
There does not have to be a formal agreement for collusion
to take place (although for the act to be illegal there must
be actual communication between companies)–for
example, in some industries there may be an acknowledged
market leader which informally sets prices to which other
producers respond, known as price leadership.
In other situations, competition between sellers in an
oligopoly can be fierce, with relatively low prices and high
production. This could lead to an efficient outcome
approaching perfect competition. The competition in an
oligopoly can be greater than when there are more firms in
an industry if, for example, the firms were only regionally
based and did not compete directly with each other.
Thus the welfare analysis of oligopolies is sensitive to the
parameter values used to define the market's structure. In
particular, the level of dead weight loss is hard to measure.
The study of product differentiation indicates that
oligopolies might also create excessive levels of
differentiation in order to stifle competition.
Oligopoly theory makes heavy use of game theory to model
the behavior of oligopolies:
 Stackelberg's duopoly. In this model the firms move
sequentially (see Stackelberg competition).
 Cournot's duopoly. In this model the firms
simultaneously choose quantities (see Cournot
competition).
 Bertrand's oligopoly. In this model the firms
simultaneously choose prices (see Bertrand
competition).
[edit] Characteristics
Profit maximization conditions: An oligopoly
maximizes profits by producing where marginal
revenue equals marginal costs.[1]
Ability to set price: Oligopolies are price setters
rather than price takers[2]
Entry and Exit: Barriers to entry are high.[3] The most
important barriers are economies of scale, patents,
access to expensive and complex technology, and
strategic actions by incumbent firms designed to
discourage or destroy nascent firms.[4]
Number of firms: "Few"–a "handful" of sellers.[5]
There are so few firms that the actions of one firm can
influence the actions of the other firms. [6]
Long Run Profits: Oligopolies can retain long run
abnormal profits. High barriers of entry prevent
sideline firms from entering market to capture excess
profits.
Product differentiation: Product may be
standardized (steel) or differentiated (automobiles).[7]
Perfect Knowledge Assumptions about perfect
knowledge vary but the knowledge of various
economic actors can be generally described as
selective. Oligopolies have perfect knowledge of their
own cost and demand functions but their inter-firm
information may be incomplete. Buyers have only
imperfect knowledge as to price,[8] cost and product
quality.
Interdependence: The distinctive feature of an
oligopoly is interdependence.[9] Oligopolies are
typically composed of a few large firms. Each firm is
so large that its actions affect market conditions.
Therefore the competing firms will be aware of a
firm's market actions and will respond appropriately.
This means that in contemplating a market action, a
firm must take into consideration the possible
reactions of all competing firms and the firm's
countermoves.[10] It is very much like a game of chess
or pool in which a player must anticipate a whole
sequence of moves and countermoves in determining
how to achieve his objectives. For example, an
oligopoly considering a price reduction may wish to
 estimate the likelihood that competing firms would
also lower their prices and possibly trigger a ruinous
price war. Or if the firm is considering a price
increase, it may want to know whether other firms will
also increase prices or hold existing prices constant.
This high degree of interdependence and need to be
aware of what the other guy is doing or might do is to
be contrasted with lack of interdependence in other
market structures. In a PC market there is zero
interdependence because no firm is large enough to
affect market price. All firms in a PC market are price
takers, information which they robotically follow in
maximizing profits. In a monopoly there are no
competitors to be concerned about. In a
monopolistically competitive market each firm's
effects on market conditions is so negligible as to be
safely ignored by competitors.
[edit] Modeling
There is no single model describing the operation of an
oligopolistic market.[11] The variety and complexity of the
models is due to the fact that you can have two to 102 firms
competing on the basis of price, quantity, technological
innovations, marketing, advertising and reputation.
Fortunately, there are a series of simplified models that
attempt to describe market behavior under certain
circumstances. Some of the better-known models are the
dominant firm model, the Cournot-Nash model, the
Bertrand model and the kinked demand model
[edit] Dominant firm model
In some markets there is a single firm that controls a
dominant share of the market and a group of smaller firms.
The dominant firm sets prices which are simply taken by
the smaller firms in determining their profit maximizing
levels of production. This type of market is practically a
monopoly and an attached perfectly competitive market in
which price is set by the dominant firm rather than the
market. The demand curve for the dominant firm is
determined by subtracting the supply curves of all the small
firms from the industry demand curve.[12] After estimating
its net demand curve (market demand less the supply curve
of the small firms) the dominant firm maximizes profits by
following the normal p-max rule of producing where
marginal revenue equals marginal costs. The small firms
maximize profits by acting as PC firms–equating price to
marginal costs.
[edit] Cournot-Nash model
Main article: Cournot competition
The Cournot-Nash model is the simplest oligopoly model.
The models assumes that there are two “equally positioned
firms”; the firms compete on the basis of quantity rather
than price and each firm makes an “output decision
assuming that the other firm’s behavior is fixed.”[13] The
market demand curve is assumed to be linear and marginal
costs are constant. To find the Cournot-Nash equilibrium
one determines how each firm reacts to a change in the
output of the other firm. The path to equilibrium is a series
of actions and reactions. The pattern continues until a point
is reached where neither firm desires “to change what it is
doing, given how it believes the other firm will react to any
change.”[14] The equilibrium is the intersection of the two
firm’s reaction functions. The reaction function shows how
one firm reacts to the quantity choice of the other firm.[15].
For example, assume that the firm 1’s demand function is P
= (60 - Q2) - Q1 where Q2 is the quantity produced by the
other firm and Q1 is the amount produced by firm 1.[16]
Assume that marginal cost is 12. Firm 1 wants to know its
maximizing quantity and price. Firm 1 begins the process
by following the profit maximization rule of equating
marginal revenue to marginal costs. Firm 1’s total revenue
function is PQ = Q1(60 - Q2 - Q1) = 60Q1- Q1Q2 - Q12. The
marginal revenue function is MR = 60 - Q2 - 2Q.[17].
MR = MC
60 - Q2 - 2Q = 12
2Q = 48 - Q2
Q1 = 24 - 0.5Q2 [1.1]
Q2 = 24 - 0.5Q1 [1.2]
Equation 1.1 is the reaction function for firm 1. Equation
1.2 is the reaction function for firm 2.
To determine the Cournot-Nash equilibrium you can solve
the equations simultaneously. The equilibrium quantities
can also be determined graphically. The equilibrium
solution would be at the intersection of the two reaction
functions. Note that if you graph the functions the axes
represent quantities.[18] The reaction functions are not
necessarily symmetric.[19] The firms may face differing cost
functions in which case the reaction functions would not be
identical nor would the equilibrium quantities.
[edit] Bertrand model
Main article: Bertrand competition
The Bertrand model is essentially the Cournot-Nash model
except the strategic variable is price rather than quantity. [20]
The model assumptions are:
There are two firms in the market
 They produce a homogeneous product
They produce at a constant marginal cost
Firms choose prices PA and PB simultaneously
Firms outputs are perfect substitutes
Sales are split evenly if PA = PB[21]
The only Nash equilibrium is PA = PB = MC.
Neither firm has any reason to change strategy. If the firm
raises prices it will lose all its customers. If the firm lowers
price P < MC then it will be losing money on every unit
sold.[22]
The Bertrand equilibrium is the same as the competitive
result.[23] Each firm will produce where P = marginal costs
and there will be zero profits.[24]
[edit] The kinked demand curve model
According to this model, each firm faces a demand curve
kinked at the existing price.[25] The conjectural assumptions
of the model are; if the firm raises its price above the
current existing price, competitors will not follow and the
acting firm will lose market share and second if a firm
lowers prices below the existing price then their
competitors will follow to retain their market share and the
firm's output will increase only marginally.[26]
If the assumptions hold then:
The firm's marginal revenue curve is discontinuous,
and has a gap at the kink [27]
For prices above the prevailing price the curve is
relatively elastic [28]
For prices below the point the curve is relatively
inelastic [29]
The gap in the marginal revenue curve means that marginal
costs can fluctuate without changing equilibrium price and
quantity.[30] Thus prices tend to be rigid.
[edit] Examples
In industrialized economies, barriers to entry have resulted
in oligopolies forming in many sectors, with unprecedented
levels of competition fueled by increasing globalization.
Market shares in an oligopoly are typically determined by
product development and advertising. For example, there
are now only a small number of manufacturers of civil
passenger aircraft, though Brazil (Embraer) and Canada
(Bombardier) have participated in the small passenger
aircraft market sector. Oligopolies have also arisen in
heavily-regulated markets such as wireless
communications: in some areas only two or three providers
are licensed to operate.
[edit] Australia
 Phone lines are controlled by Telstra, then rented to
other providers and further rented to customers. Any
rate hikes by Telstra are felt by all customers with a
phone line no matter the provider.
 Most media outlets are owned either by News
Corporation, Time Warner, or by Fairfax Media[31]
 Grocery retailing is dominated by Coles Group and
Woolworths.[citation needed]
[edit] Canada
 Three companies (Rogers Wireless, Bell Mobility and
Telus) share over 94% of Canada's wireless market.[32]
[33]

[edit] United Kingdom

  Four companies (Tesco, Sainsbury's, Asda and
Morrisons) share 74.4% of the grocery market.[34]
 The detergent market is dominated by two players,
Unilever and Procter & Gamble.[35]
[edit] United States
 Many media industries today are essentially
oligopolies.
o Six movie studios receive 90% of American film
revenues.
o The television industry is mostly an oligopoly of
eight companies: The Walt Disney Company,
CBS Corporation, Viacom, NBC Universal,
Comcast, Hearst Corporation, Time Warner, and
News Corporation.[36] See Concentration of media
ownership.
o Four major music companies receive 80% of
recording revenues.
o Four wireless providers (AT&T, Verizon
Wireless, T-Mobile, Sprint) control 89% of the
cellular telephone market.[37]
o There are just six major book publishers.
o They are three major smartphone companies
(Apple, Inc. with the iPhone, Google's Android,
and the Blackberry).
 Healthcare insurance in the United States consists of
very few insurance companies controlling major
market share in most states. For example, California's
insured population of 20 million is the most
competitive in the nation and 44% of that market is
 dominated by two insurance companies, Anthem and
Kaiser Permanante. [38]
 Anheuser-Busch and MillerCoors control about 80%
of the beer industry.[39]
 Detroit's Big Three were leaders in the auto industry
for many years. However globalization and demand
for foreign imports have driven down sales sharply in
recent years.
[edit] Worldwide
 The accountancy market is controlled by
PriceWaterhouseCoopers, KPMG, Deloitte Touche
Tohmatsu, and Ernst & Young (commonly known as
the Big Four)[40]
 Three leading food processing companies, Kraft
Foods, PepsiCo and Nestle, together achieve a large
proportion[vague] of global processed food sales. These
three companies are often used as an example of "The
rule of 3"[41], which states that markets often become
an oligopoly of three large firms.
 Boeing and Airbus have a duopoly over the airliner
market[42]
[edit] Demand curve
Above the kink, demand is relatively elastic because all
other firms' prices remain unchanged. Below the kink,
demand is relatively inelastic because all other firms will
introduce a similar price cut, eventually leading to a price
war. Therefore, the best option for the oligopolist is to
produce at point E which is the equilibrium point and the
kink point. This is a theoretical model proposed in 1947,
which has failed to receive conclusive evidence for support.
In an oligopoly, firms operate under imperfect competition.
With the fierce price competitiveness created by this sticky-
upward demand curve, firms use non-price competition in
order to accrue greater revenue and market share.
"Kinked" demand curves are similar to traditional demand
curves, as they are downward-sloping. They are
distinguished by a hypothesized convex bend with a
discontinuity at the bend–"kink". Thus the first derivative
at that point is undefined and leads to a jump discontinuity
in the marginal revenue curve.
Classical economic theory assumes that a profit-
maximizing producer with some market power (either due
to oligopoly or monopolistic competition) will set marginal
costs equal to marginal revenue. This idea can be
envisioned graphically by the intersection of an upward-
sloping marginal cost curve and a downward-sloping
marginal revenue curve (because the more one sells, the
lower the price must be, so the less a producer earns per
unit). In classical theory, any change in the marginal cost
structure (how much it costs to make each additional unit)
or the marginal revenue structure (how much people will
pay for each additional unit) will be immediately reflected
in a new price and/or quantity sold of the item. This result
does not occur if a "kink" exists. Because of this jump
discontinuity in the marginal revenue curve, marginal costs
could change without necessarily changing the price or
quantity.
The motivation behind this kink is the idea that in an
oligopolistic or monopolistically competitive market, firms
will not raise their prices because even a small price
increase will lose many customers. This is because
competitors will generally ignore price increases, with the
hope of gaining a larger market share as a result of now
having comparatively lower prices. However, even a large
price decrease will gain only a few customers because such
an action will begin a price war with other firms. The curve
is therefore more price-elastic for price increases and less
so for price decreases. Firms will often enter the industry in
the long run.